Thailand’s $21 billion Government Pension Fund (GPF) plans to add emerging market bonds to its portfolio and is considering issuing a second global multi-asset mandate, as it pushes to gradually raise its overseas asset allocation to 40% from the current 30% limit.

The new EM allocation, worth up to 2% of the overall portfolio or $420 million by asset value, will focus on local-currency debt and be run by external managers, Arsa Indaravijaya, GPF's head of investment strategy, said in an interview. It expects to start investing in the asset class by the end of this year or start of 2018, once the relevant investment mandates have been awarded.

“The fact we are considering EM debt is because it gives us diversification to our portfolio,” he told AsianInvestor. “We are moving to an ageing society. I don't think the yield of Thai baht bonds will pick up that much, so there is time that we should consider higher returns outside Thailand.”

GPF's portfolio currently has a high concentration in domestic bonds, which account for about 50% to 55% of its overall allocation. However, getting clearance for a higher investment allocation to overseas markets in general would likely be a “very long process”, Indaravijaya noted on the sidelines of the Financial Times Investment Management Summit Asia in Hong Kong earlier this month.

Recent precedents suggest that too. GPF asked in 2011 to increase its foreign allocation to 35% from 25%. But that cap increase was only approved in March last year and, even then, only to 30%.
 
Still, to help with its growing overseas investment needs, Indaravijaya said GPF is thinking about issuing a second global multi-asset mandate. But the idea is at a relatively early stage, so he was unable to provide any further details. GPF awarded its first multi-asset mandate for $300 million in mid-2014.

Within international fixed income, Indaravijaya said he preferred EM debt to developed market bonds because of the higher growth potential of EM economies and the better opportunities for generating alpha. He added that local currency bonds were generally of higher quality, with an average credit rating of BBB compared with BB or BB- for hard-currency debt.

When asked about the risk to EM debt returns if US monetary tightening triggered capital outflows, Indaravijaya said he didn't think interest rate rises in major economies would necessarily lead to EM rate hikes, and so would have little impact on the local currency space.

GPF will use the JP Morgan GBI-EM index as a benchmark for its EM local currency bond investments. GPF’s current offshore bond investment tracks the Bloomberg Barclays Global Aggregate Bond excluding Treasuries index and currently takes up about 1.5% of GPF’s overall portfolio.

Other allocations

GPF’s portfolio hasn’t changed much since January-end except for its allocation to global equities. As of end December the fund was 10%-invested in developed market equities, with another 2.15% in EM equities. It has since cut its exposure to developed markets equities to 8.5%, due to high valuations, and increased its EM equities exposure to 3.5%, Indaravijaya said.

The fund is also aiming to raise its exposure to private markets to 14.5% from 11.3% currently. But Indaravijaya admitted that it was difficult to find sound investments in the alternatives space. Take infrastructure for example. The current expected annualised return on toll road and power plant investments is about 8%, where previously a double-digit return would be expected, Indaravijaya said.

GPF has 1.22% of its overall portfolio in Chinese assets, split evenly between equities and bonds, and is not planning to raise that. The fund uses external managers to run its Chinese equity portfolio and invests in-house for China onshore bonds via the Qualified Foreign Institutional Investor (QFII) scheme.

But GPF could yet, subject to gaining official approval, migrate its China bond assets from the QFII channel to the direct China interbank bond market (CIBM) programme, as the latter has fewer restrictions, Indaravijaya said. 

The QFII scheme is losing popularity among foreign investors. According to a Standard Chartered survey released last week, which polled some 900 investors in March, 32.7% of respondents said they planned to use the CIBM direct scheme to grow their investments in China. Just over 40% said they will use Stock Connect, while 15.5% said they intended to use the offshore renminbi version of QFII (RQFII), 9.6% the mutual recognition of funds scheme, and only 1.9% the QFII.